Q3 2022 Nov Inc Earnings Call
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
[music].
Yeah.
Good day, ladies and gentlemen, and welcome to the N V third quarter 2022 earnings Conference call. At this time, all participants are in a listen only mode.
Later, we will conduct a question and answer session and instructions will follow at that time.
If you would like to ask a question. Please press star one on your telephone as a reminder, this conference is being recorded I would like to introduce your host for today's conference. Mr. Blake Mccarthy, Vice President of corporate development and Investor Relations. Please go ahead Sir.
Welcome everyone to <unk> third quarter 2022 earnings conference call.
With me today are clay Williams, our chairman, President and CEO and Jose Bayardo, our senior Vice President and CFO .
Before we begin I would like to remind you that today's comments are forward looking statements within the meaning of the federal securities laws.
12 risks and uncertainty and actual results may differ materially.
No one should assume these forward looking statements remain valid later in the quarter or later in the year for a more detailed discussion of the major risk factors affecting our business. Please refer to our latest forms 10-K, and 10-Q filed with the Securities and Exchange Commission.
Our comments also include non-GAAP measures.
Reconciliations to the nearest corresponding GAAP measures are in our earnings release available on our website.
On a U S GAAP basis for the third quarter of 2022 and will be reported revenues of $1 89 billion and a net income of $32 million.
Our use of the term EBITDA throughout this morning's call corresponds with the term adjusted EBITDA as defined in our earnings release.
Later on the call we'll host a question and answer session. Please limit yourself to one question and one follow up to permit more participation now let me turn the call over to clay. Thank.
Thank you Blake.
For the third quarter of 2022, <unk> consolidated revenues grew 9% sequentially and 41% year over year with all three segments posting solid double digit year over year growth.
Despite continuing supply chain friction and increased turmoil in the global economy. Our teams were once again able to drive higher sequential EBITDA at 28% leverage on top line gains.
Demonstrate international offshore markets that are starting to gather momentum.
Our early cycle rig count activity driven businesses continued to trend positively on rising volumes and pricing recovery in North America, and increasingly in international and offshore markets.
So far despite fears of recessionary demand destruction commodity prices have remained strong, which I think is appropriate the world faces a significant and scary energy shortfall after years of Underinvestment in our outlook is very constructive as a result.
However, this constructive dynamic has not yet translated into the big uplift in capital equipment orders, we expect our overall book to Bill for the third quarter slip slightly below 198% to be exact while we saw strong orders and a 116% book to bill in completion and production solutions, Rick Technology's book to Bill came in below one and our combined reported backlog for capital equipment declines.
Lately less than 1%. We believe this is transitory and we expect orders to grow in coming quarters. Let me explain why starting with your observation that the third quarter book to Bill was off trend for US helped by solid orders and renewables technologies through the past year and obese consolidated book to Bill for the trailing 12 months through the third quarter has been 116%.
Our customer share our optimistic outlook, but they face some near term constraints that are delaying capital equipment orders, especially for U S and European wholesale participants first the availability and cost of capital to the oilfield has emerged as a limitation that lending from banks and institutions in public and private equity investment capital had been greatly diminished for oil and gas at least in the <unk>.
First meeting investments for many must be funded entirely from cash flows from operations cash flow for service companies is only now recovering given pricing leverages emerged and only the past quarter or two and mostly in North America.
Companies in the U S and Europe are highly focused on returning capital to shareholders rather than reinvesting in their businesses, Despite extraordinary well and project level return economics.
This trend started with E&ps and management teams incentivize on cash flow returns to shareholders and is now taking root with oilfield service companies as well.
And for the many oilfield service providers and drillers that have emerged from bankruptcy in the past year or two they find themselves with their former debt holders as new owners, who are insistent on recouping their losses and cash as quickly as possible.
Third the misguided energy transition timeframe narrative, specifically to move away from oil and gas within a few years rather than a far more realistic decades timeframe has diminished the appetite for along with projects in some markets.
Even when there is clear line of sight to exceptional well and project returns many struggled to pull the trigger on long term projects of course, the notion that oil and gas will be obsolete in the next five to 10 years is complete nonsense, but it does make decisions on a 20 year capital project, a little more anxiety ridden. Additionally, the supply chain challenges over the past two years have eroded confidence and schedules and delivery.
Times injecting additional transient execution anxiety into these decisions importantly, these constraints to capital investment are mostly confined in North America, and European participants, who historically, where the fastest to react to higher commodity prices and contrast, the views held by <unk> and sovereign wealth funds in the Middle East Asia Africa, and Latin America today leave participants.
Far more financial freedom to respond to commodity price signaling.
That is why we were not surprised to see growth starting to accelerate and international markets and frankly, we would not be surprised to see it surpassed North America, where in addition to free cash flow reinvestment constraints. The market is facing some short term ceilings on crew and equipment availability, which by the way is translating into higher rig rates and willful service pricing our customers in North America has seen over the past.
Couple of quarters.
We think incremental E&P spending in 2023 in North America will be required just to hold rig and completion activity flat. In contrast, we see the rest of the world gearing up for more activity in 2023, as OPEC invest to grow production and recapture it swing producer status from the U S.
That's not to say that there aren't challenges in international markets. The Middle East has been tough on oilfield service providers for many years as oversupply to the past decade, and large competitive tenders walked many into long term contracts at low margins pre COVID-19. However, these are steadily expiring in <unk> are calling for more and better equipment paving the way for better oilfield service price.
Leverage and returns and rising demand for better technologies.
Despite concerns of recession in the near term headwinds to higher oilfield activity. We are confident they can't last and when the trend breaks. The other way is going to break hard oil and gas is still the industry that powers all other industries and price elasticity is low which the world will learn once again as it moves through this recession really has all consumption fallen even during recessions.
The development of oil and gas production has always been one of the most capital intensive industrial pursuits wells requires a highly specialized expensive fit for purpose assets and consumables to construct oilfield activity is consumptive of oilfield equipment and this tiger can't change the stripes, Despite earnings capital pledges and adoption of capital light business models that don't quite <unk>.
Square with the reality of constructing well bores, you can cannibalize idle equipment and deplete your stores of consumables and kick the can down the road for a little while but rigs drill pipe pumps coiled tubing units you name. It all of the things <unk> are essential to getting the commodities out of the ground installed base of equipment across the industry is being run harder and harder quarter.
By quarter in the Underinvestment in maintenance and replacement equipment over several years is beginning to impact the industry's ability to respond to the price signals currently being sent by the commodities and while commodity prices have pulled back from the highs. We saw earlier. This year are worried at this pullback is concealing a looming supply shortfall.
Leading voices in both the industry and the commodity markets had been ringing alarm bells for weeks global shortages of middle distillates, such as diesel gas oil and heating oil are intensifying rather than easy for example, U S. Distillate inventories at the beginning of this month, we're at the lowest level seen since the government began collecting weekly data and 1982 and European in East Asia.
Tories are at the lowest since the mid two thousands U S crude stocks, including the strategic petroleum reserve and falling to the lowest level since 2002, according to the EIA.
And while U S production has grown off recent lows it has been less than expected.
So as U S supply growth continues to disappoint to the downside even as we've drawn down half of our inventory of DUC wells.
With SPR releases of 1 million barrels per day set to wind down soon with Russian oil supply to decline following sanctions with OPEC under producing as quotas, even before its recently announced cuts.
With Europe poised to see more gas to oil switching this winter and with global demand generally suppressed from normalized levels due to continuing COVID-19 restrictions in China. It feels like we and by that I mean mankind hurtling towards a catastrophe very painful and damaging energy crisis, we'll look back and ask how we ended up in energy bankruptcy two ways.
<unk> then suddenly to.
To quote him in ways of Sun also rises.
For a hard lesson on the importance of fossil fuels to our way of life.
Throughout the downturn of the past seven years, a key question, we had been asking ourselves at Adobe has been when the oilfield picks up in orders resume what will our customers need.
<unk> has steered our R&D efforts and I'm proud of our team's developments than.
And then the last Super cycle 2004 to 2014, the industry bought equipment that could develop increasingly challenging reservoirs as quickly as possible.
Bigger tougher and stronger equipment, because operators were focused on drilling longer laterals and drilling in the deeper waters as we look to this next up cycle. We believe our customers will place greater focus on maximizing recoveries from existing fields, along with more efficient development of new fields, improving safety performance and reducing greenhouse gas emissions all with a close eye on project capital returns we can.
Specced, new digital technologies to shape that future.
Historically operators wells developed only a fraction of hydrocarbons in place our customers who employ the world's finest reservoir engineers.
We can do better.
Where they need to place a will to maximize production of current industry offerings like the latest in rotary <unk> technology, while allowing the type of control that enables precise well placements have not enabled the downhole visibility needed for precision will placements, it's like driving a Ferrari on a highway at night and only being able to turn on your headlights. Once every 10.
You may have a beautiful powerful piece of machinery, but you're simply not going to be going very fast and if you do you might end up off the road and the ditch.
That's where nov's newest technology comes into the equation, starting with our proprietary evolve <unk> wired drill pipe our operators can have uninterrupted high speed data flowing from the bit to the surface like keeping the headlights on bright 24, 7% uninterrupted data feeds the digital drilling solutions, we developed including a kaizen intelligent drilling optimizer and.
<unk> automation, which in turn digest visualized and interpret data to help guide the driller to optimal well placement reservoir development rig efficiency increased safety and customers had been pairing our novo's drilling system with our empowered managed pressure drilling offerings to allow even greater control.
Downhole pressure control and the most challenging drilling environments recently, one of the world's largest oil company has tested this combined package for the first time in its downhole Engineering Department became our biggest proponent across its organization.
Same operator is using nov's, new Max edge technology to gathering contextualized real time, well data into the cloud.
Our new ideal E Frac technology, which lowers greenhouse gas emissions and operating cost for pressure pumping companies continues to generate a lot of buzz in the industry, while our new eco booster and power blade or doing the same for offshore drillers <unk> investments and drillbit technologies are enabling it to gain share in conventional oil and gas operations by lowering drilling costs and time, thereby.
<unk> emissions associated with Wellbore construction.
<unk> is also carved out market leading positions in geothermal drilling with its hard rock drilling challenges.
And while we believe the transition to renewable energy will take decades. We also continued to invest in renewable energy solutions to build on our market leading position in the supply of offshore wind installation technology.
In short world face with serious complex and shifting energy challenges nov's developments in both traditional oil and gas and renewables technologies or the toolkits, our customers will employ to ensure safe and reliable energy continues to lift mankind out of poverty. We expect the combination of <unk> wired drill pipe artificial intelligence digital solutions.
<unk> computing and managed pressure drilling systems to become standard toolkit on well sites around the world just.
Just like our top drives and drilling equipment packages are and just like our wind turbine installation technology has become standard kit on offshore construction vessels.
And just like generations of talented engineers and scientists have transformed energy production through up cycles and down cycles across our 160 year history.
So for those talented engineers and scientists listening today and to all my <unk> teammates. Thank you for all that you do you are simply the best with that I'll turn it back to Jose Thank you clay.
<unk> consolidated revenue in the third quarter of 2022 was $1 89 billion up 9% sequentially and up 41% year over year, all three segments posted another quarter of strong growth and improved profitability and achieved or exceeded the 2020 to exit margin targets. We provided at the beginning of the year.
During the third quarter, we completed the sale of our operations in Belarus, and classified our Russian operations as assets held for sale, which collectively resulted in $76 million in impairment charges, most of which was related to foreign currency translation adjustment losses, and which increased SG&A. These charges were partially offset by credits relate.
The gains on sales of previously reserved inventory, resulting in total adjustments or other items of $63 million, we do not expect additional charges in the fourth quarter.
Cash flow used by operations during the third quarter was $106 million, primarily due to working capital builds needed to support our rapid topline growth and to mitigate continued supply chain risks capital expenditures in the quarter totaled 50.
$9 million and we ended the third quarter with $1 73 billion in debt and $1 billion in cash.
For the fourth quarter, we expect to generate between 1% to $200 million in free cash flow and we expect free cash flow conversion to improve significantly in 2023.
Moving on to segment results.
Our Wellbore technologies segment generated $741 million in revenue during the third quarter, an increase of $75 million or 11% compared to the second quarter and 46% compared to the third quarter of 2021, the segment realized its eighth straight quarter of revenue growth by capitalizing on improving global drilling activity levels and better execution.
Houston against ongoing supply chain challenges.
While activity in North America, maybe reaching a temporary plateau. The segment continues to benefit from pent up demand for its proprietary drilling tools and we are now starting to see a sharp increase in demand from the middle east as the industry prepares to ramp activity in 2023.
EBITDA flow through was 31%, resulting in a $23 million sequential increase to $145 million or 19, 6% of revenue compared to the third quarter of 2021, EBITDA improved $68 million, representing 29% EBITDA flow through.
Our MD <unk> business posted solid double digit sequential growth from both its legacy surface data acquisition system operations and has evolved wired drill pipe optimization services. Despite continued challenges related to procuring specialized electronics and circuits used by the business Rep.
Revenue from the unit surface data acquisition operations realized a strong improvement in sales into Africa, and Latin America with revenue in most other major regions generally moving in line with drilling activity levels.
After a modest pullback in Q2 due to a few rigs in the north sea completing wells and moving on to new locations or evolve services continue to gain greater market adoption and realized a sharp recovery in the third quarter.
In addition to new jobs in the North Sea. The business also secured two new wired drill pipe optimization projects in the Middle East one for major integrated oil company and another from a large national oil company as well as projects supporting drilling operations on two carbon sequestration wells that will be used to inject cotwo from onshore sources one to two.
Metres below the seabed for permanent storage.
Our unique ability to pair full downhole visibility with market, leading software analytics drives value for customers through more efficient and productive well bores, which should make this offering a key growth driver for this business moving forward.
Our downhole business reported revenue growth in the upper teens with solid EBITDA flow through improved execution against supply chain related challenges that limited the availability of special elastomers in certain grades of steel used in the business as high spec products allowed the unit to better meet robust demand for its proprietary tools, which drive improved drilling efficiencies for oil and gas offer.
<unk>.
Our REIT hike log drilled that business posted low double digit sequential increase in revenue led by strong growth in the western hemisphere, resulting from market share gains in the U S. A pickup in projects in the Gulf of Mexico, and the seasonal rebound of Canadian activity.
Eastern Hemisphere revenues were mostly flat with solid growth in Asia, offsetting sizeable Q2 shipments into northern Africa that did not repeat.
And continued supply chain challenges affecting deliveries in the middle East.
Looking ahead, we expect increasing demand from eastern hemisphere markets, particularly the middle East to drive the next leg of growth for this unit.
Our well site services business posted mid teens sequential revenue growth with strong incremental margins.
Revenue for the business is solid control product line was up in both western and eastern hemispheres with particular strength in offshore markets and in the middle East or new <unk> portable solid treatment unit is beginning to gain wider adoption winning its first offshore contract with a major operator in the north sea off the back of a successful.
<unk> completed in the second quarter.
By enabling the disposal of drill cuttings at the well site I know <unk> enables significant reductions in transportation costs and carbon emissions.
As this business continues to see volume growth. Our team is continuing to push pricing to offset continued inflationary and supply chain challenges and to garner appropriate returns for the advantages provided by <unk> technology.
Our grant <unk> drill pipe business posted relatively flat results as delayed deliveries of green tubes negatively impacted our ability to deliver on the business as backlog during the quarter.
Delayed vessels rail transportation bottlenecks and downtime in one of our vendor steel Mills limited plant throughput during the quarter.
Despite these difficulties a favorable mix from the strength in premium large diameter orders from international and offshore markets over the past two quarters allowed the unit to mostly offset the cost of the disruptions.
Orders remained healthy in Q3 with North American drilling contractors, representing the bulk of the orders.
Notable reversal from Q2, where orders primarily originated from international markets.
Additionally, the recent orders reflect a step back in five and a half inch pipe demand, which suggests that there are limited number of rigs equipped with the necessary high torque packages and setbacks needed to run the larger OD pipe that most operators want.
Looking ahead to the fourth quarter revenue is expected to improve but flow through will be limited due to a less favorable product mix.
Our <unk> business posted a high single digit sequential revenue improvement with strong incremental margins. The solid performance was led by our coatings operations, which achieved its fourth straight quarter of double digit growth and benefited from improved availability of key resins and polymers building demand in the eastern hemisphere, and a full quarter contribution from the reopening.
Of our Amelia, Louisiana coating plant.
Our inspection operations also delivered solid results, mainly driven by strong demand for inspection and threading services in the U S and Latin America.
Looking forward, we expect flattish results for this business in Q4 due to holidays and scheduled maintenance at certain facilities.
For our Wellbore technologies segment, we expect building momentum in the eastern Hemisphere, and pent up demand for our products to be partially offset by plateauing, North American drilling activity, resulting in revenue growth of 2% to 6% with EBITDA flow through in the 30% range in the fourth quarter.
Our completion and production solutions segment generated revenues of $681 million in the third quarter of 2022.
An increase of 7% from the second quarter, an increase of 42% compared to the third quarter of 2021.
Adjusted EBITDA for the third quarter was $56 million or eight 2% of sales an increase of $24 million from the second quarter.
The 57% EBITDA flow through was primarily the result of much improved execution on offshore projects and the easing of supply chain constraints, which allowed for an acceleration of pent up deliveries and in some instances a pull forward of planned Q4 shipments book to Bill was 116% the seventh straight quarter of a book to Bill North.
One quarter.
Quarter, ending backlog increased to $1 48 billion, reaching its highest level since Q1 of 2015.
Despite capital constraints on our customers sticker shop from inflation impact on pricing and stretch supply change strong orders reflects the industry's increasing need to refresh its asset base and provide us with more confidence in the outlook for the order flow in our capital equipment businesses.
Our process and flow technologies business posted sequential revenue growth in the upper single digits with a strong rebound in profitability the business unit significantly improved execution with progress accelerating our supply chain has normalized and COVID-19 restrictions ease.
<unk> for the business was soft, but we believe we will see growing confidence and market outlook project economics, and the ability for the industry to clear shipyard bottlenecks all of which are needed to move new projects forward. During the quarter. We saw an increase in feed studies, which we expect to convert into new project awards in future quarters.
Our <unk> conductor pipe connections business, which posted a book to bill of 187% in the third quarter further supports our growing optimism for offshore projects.
As we've mentioned many times before demand for conductor pipe tends to be a leading indicator of offshore activity and the business is starting to see an increase in <unk> for projects many of which have been pushing to the right for over five years finally advance.
We're also seeing more signs of life in our subsea flexible pipe business, which is now posted a book to bill greater than 100% in four of the last five quarters.
During the third quarter. The business also saw a substantial improvement in its operating results and posted sequential revenue growth in the mid teens with outsized EBITDA flow through the strong results came from significant improvements in the availability of raw materials, which enabled efficient progress and early deliveries on certain projects, while supply chain challenges appear.
To be easing, we anticipate a slower fourth quarter as the strong results in Q3 were due in part to pulling forward work from Q4.
Despite the anticipated fall off in the fourth quarter, we expect new orders will remain strong which should set the stage for continued pricing improvement in 2023.
Our pumping mixture operations also realized outsized revenue growth with solid incrementals, the lifting of Covid lockdowns in Shanghai allowed the operation to finally ship pent up deliveries to customers while orders increased sequentially. The large increase in shipments prevented the business from achieving what would've been the business unit's eighth straight quarter with a book to Bill.
Rather than one.
Our intervention and stimulation equipment business realized a mid single digit sequential decrease in revenue.
Last quarter, we noted that the completion of large aftermarket reactivation projects along with the extended lead times for Newbuild deliveries would result in a sequential decline in revenues. However, growing demand for orders continued marking the fourth quarter in a row of growing backlog bookings included 67500 horsepower of new pressure pumping equipment.
Along with orders to rebuild an additional 30000 horsepower of pumping units. We also saw a pickup in demand for coiled tubing equipment due to rapidly tightening capacity in North America.
Orders included sales of injectors pumps nitrogen units and other support equipment along with the sale of the first new unit for the U S market that we've had in three years.
Noteworthy and somewhat unsurprisingly the purchase of the new unit came from a private service company that didn't have to worry about public investors and had capital to invest in what should be a high return opportunity.
Despite activity in North America that appears to be arriving at a temporary plateau and public oilfield service companies that are reluctant to spend capital. There is a pent up need to replace and upgrade aging equipment and we think E&P operators will reward those who provide the most efficient services by using the latest technology.
Similarly in international markets service providers signed low rate multiyear contracts during the depths of the pandemic have been reluctant to invest in assets. However, our quoting activity improved materially in Q3 as customers prepare for upcoming tenders.
Our fiber glass systems business unit posted a solid sequential revenue increase resulting from improved deliveries into chemical and industrial markets in southeast Asia, and in Brazil, and from improving demand from oil and gas markets with large shipments into Latin America, and the middle East.
This growth was partially offset by our fuel handling business, which experienced a slight falloff when compared to the record levels that saw during the second quarter.
Sales into the marine and offshore markets were mostly flat, but we're announcing a notable increase in interest for marine scrubbers, while shipping companies were trying to capitalize on a once in a lifetime market dynamic and its associated pricing. We understandably saw no demand for new scrubbers, despite a large spread between low and high sulfur diesel prices do not.
High opportunity cost of taking vessels out of service for shipyard modifications.
Now the shipping rates are beginning to normalize customers are once again planning to bring vessels support and install scrubbers. So that they can capitalize on the spread and fuel prices.
Looking ahead to the fourth quarter, we expect to see a modest pullback in operational results for our fiberglass business due to several large deliveries in the third quarter that will not repeat and due to normal seasonality in our fuel handling product sales as we move into colder weather months.
For the fourth quarter, we expect growing opportunities associated with our completion production solutions segment's backlog to be mostly offset by certain projects that were pulled forward into the third quarter and supply chains that remain elongated resulting in revenues that should be relatively flat. We also expect a less favorable sales mix will compress EBITDA.
<unk> between 50, and 100 basis points.
Our rig technology segment generated revenues of $511 million in the third quarter of 2022, an increase of $49 million or 11% sequentially and an increase of 31% compared to the third quarter of 2021 sequential revenue.
Revenue growth was driven primarily by continued improvement in our aftermarket business and a higher rate of progress on offshore wind in Saudi rig projects.
Adjusted EBITDA improved 11 million sequentially to $52 million or 10, 2% of sales.
New orders totaled $119 million, representing a book to bill of <unk>, 9%.
Total backlog for the segment at quarter end was $2 78 billion.
While the day rate environment for both land and offshore rigs continues to improve recessionary fears combined with the industry's memories of the past eight years has public boards and management teams reticent to make large capital equipment investments. However, we remain encouraged by what we're seeing in both land and offshore markets.
In the U S extraordinary rates of change in day rates, we saw during the first six months of the year slowed in the third quarter, but they continue to decline and are now pushing $40000.
Current rates are certainly getting customers more interested in reinvesting in their existing asset basis similar to what we saw in our intervention and stimulation equipment business and to what has happened in the E&P space is not surprising to see private companies to be the first movers to capitalize on high rate of return investment opportunities associated with Newbuild assets.
During the third quarter, we booked an order for a new high spec land rig for a private drilling contractor, who is supported by term contracts from our large west Texas operator.
In offshore markets activity continues to climb higher with utilization of marketed drill ships, reaching 78%, leaving Illinois five ultra deepwater Drillships currently available to go to work.
Additionally, we continue to see our customers book contracts with dramatically improved pricing and extended duration compared to what we saw a year ago. We're now routinely seeing ultra deepwater drillships commanding $400000 plus day rates and Saudi Aramco alone has awarded a 184 years' worth of contracts for Jackups.
Since August of 2021.
While the capital constraints on drilling contractors limit our capital equipment order intake the improving environment and associated cash flows for our customers are driving a growing sense of urgency from drilling contractors to increase investments in maintenance and reactivation, which is reflected in the surge in demand we've seen within our aftermarket operations our aftermarket operations.
Posted 11% sequential growth in the third quarter revenue from spare parts sales increased double digits as we improved execution against continued supply chain constraints in the face of growing demand. However, the rate of order intake continues to outpace our ability to ramp our operations.
While supply chain is slowly improving availability and lead times for certain grades of high alloy steels castings plc drive and switch gear remained challenged Nevertheless, we're continuing to ramp throughput and our customers are working with us to better plan and schedule aftermarket projects and other needs.
We posted another quarter of strong spare parts bookings our best since the first quarter of 2020, and our current aftermarket backlog is approximately double what it was at this point last year.
Our field Engineering group is continuing to see an increase in quoting activity related to reactivation and recertification projects pressure control upgrades and enhanced automation with the heaviest concentration of inquiries coming from Brazil, Norway, and the middle East and the U S Gulf of Mexico.
While we did not book a wind vessel this quarter revenue recognized from our healthy backlog continues to ramp and the outlook for this sector remains very encouraging with orders for new vessels, becoming increasingly luckily in the near term.
Looking ahead market fundamentals continued to improve for our core markets, giving us confidence that our order book will improve over the next few quarters.
Additionally, our current backlog for both capital equipment and aftermarket parts and services provides us with ample opportunity to grow revenue and profitability in this segment.
Specifically for the fourth quarter, we expect revenue in rig technologies to grow between 5% to 10% sequentially with incremental margins between 20% and 25% with that we'll now open the call to questions.
Thank you to ask a question you will need to press star one on your telephone we ask that you yourself to one question one follow up question.
One moment, while we compile the Q&A roster.
Okay.
Our first question comes from the line of Scott Gruber with Citi. Your line is open. Please go ahead.
Yes, good morning good.
Morning, Scott.
So your margins are basically.
Now, where you thought they would be in <unk> and I understand the puts and takes in <unk>.
I'm trying to get a sense for where we stand on multiple fronts.
So some additional color on.
Where you stand on resetting the price book.
Where do you stand I'd seen improvement in delivery cost and delivery timing.
<unk>.
What are you seeing in terms of stability on an input cost inflation. So just some color I know these are kind of key areas you guys have been focused on.
Last year. So some additional color on these large influencers would be great.
Yes, Scott it's a good it's a good question and it's a lot of things intention here. So over the past couple of years, we've been taking cost out of our organization and we've been focused on pushing prices up we had the most success. Our quick turn businesses that are associated with rising drilling activity in North America.
And so that's gone in the right direction, but on the other hand as we've talked about on prior calls and in our prepared remarks still face a lot of supply chain issues.
So kind of a quick update on where we are on that broadly things are getting better.
However, I do want to say, we're a long way from being normalized in certain categories, we're seeing things get a little bit worse, and so things like electric motors actuators Plc's lot of electrical components. Some of those got more expensive and more difficult through the quarter.
Certain castings in particular coming out of Europe , I think there's something like 15 steel mills in Europe .
Our.
Situation there.
A little pressure on some of our businesses there.
Are the counter examples but.
Items like freight freights, probably down 60% off the peak, which is good going in the right direction, but still double where it was in 2020 and triple where it was in 2019.
And as well, we're seeing deliveries of certain items push out and so it wasn't just sort of broad normalization underway in ports are slowly clearing.
We're still way off the Mark in terms of delivery reliability costs are still elevated.
We face.
Workforce.
Challenges as do our vendors, particularly across North America, one of them one of them.
Developing items that we saw through the third quarter some of our third party machine shops.
Now we are running into labor shortages, and machinist shortages and so on time delivery.
Slipped quite a bit in Q3 so.
Those are the factors that are offsetting some of the price increases that we've been able to get in some of the costs that we have.
Yet we've taken out so.
I think puts and takes in both directions around around the margins.
Got you I.
Appreciate all the color there.
And just shifting to capital return, it's a hot topic in oil services.
At this juncture, we've heard several peers.
Put forth capital return commitment.
I'm thinking about <unk> I know you guys still have.
A long way here to see kind of full margin recovery.
But assuming that plays out.
Do you think about our capital return commitment and whether that makes sense.
Yeah, Hey, guys Jose I'll tackle this one.
Yes.
It's a good question and certainly sort of getting back to more normalized margins is something that we're very focused on.
And also just managing the tremendous amount of growth that we're currently experiencing.
Our business.
Which is a good news bad news story with a good news for outweighing, the bad news right when Youre growing 10% roughly 10% a quarter in 40 plus percent year over year provided that you Werent mismanaging youre working capital prior to that.
Going to consume some working capital and use some cash flow right.
Where we are as a later cycle business, but we'd much rather.
Rather sacrifice a little free cash flow today to have a lot more down the road.
So I think we've been pretty clear about the historical cash flow generation capability of this business, which we expect to be even stronger.
Going forward, we have never shied away from returning capital to our shareholders, having returned almost $5 billion of capital.
<unk>.
Since 2014.
And.
We've also been pretty clear about where we need to see our leverage metrics get which is back to the two times or better gross debt to EBITDA metrics. So we're looking forward to arriving at the right place and time to where we can step up our return of capital again.
<unk> are certainly all heading in the right direction, so things look promising from that standpoint.
I appreciate that we have to remind people that working capital is a high class problem when it when it builds quickly so.
Well continue to stay updated thanks I appreciate it you bet you bet.
Got it.
Thank you one moment for our next question.
Our next question comes from the line of Marc Bianchi with Cowen. Your line is open. Please go ahead.
Hey, thanks.
You guys talked about.
And expectation for improving orders I'm, just curious it seemed like.
It's likely that you're going to stay above the one times book to bill here and caps.
As we move forward when do you think rig tech could get back above one times.
Yes, Mark I think.
I actually think Q3 is just a temporary blip and I appreciate the question because.
If you focus in on our rig order book for the third quarter, what really changed from the second quarter was the absence of a wind turbine installation vessel. If you go back for the past several quarters, we pretty much had a wind turbine installation vessel large order every quarter and so we are engaged on building out I think 11 winter.
Urban installation vessels as a result of that growing backlog in that space and what happened in the third quarters, we just didn't get it so it just fell off.
If you look at our sort of more.
Traditional oilfield order book in the third quarter, it actually for capital equipment, which is really the only piece of it that we report it was it was up.
For both offshore and land customers I think Jose mentioned in his prepared remarks, we've got an order for our high spec rig from a north American operator, and so that helped double land rig orders sequentially and triple land rig orders year over year.
And then offshore continued to move up as well, but going up about 15% sequentially. The point I was trying to make in my prepared remarks, though is that even at rising levels moving up sequentially up into the right still far less than the industry needs in order to sort of.
<unk> launched the major industrial effort, that's required to get back to growing oil and gas production around the globe and so.
We think this is growing the right way.
As I explained at length in my prepared remarks, the dynamics around demand for what we sell I think are very strong very constructive over the next several quarters and really the next several years and so we're excited about that and then to kind of round out the picture.
Our rig technology capital equipment is.
Only one of really three big ways that drilling contractor spend money with <unk> and the other two are spare parts to support their rigs.
As well there is and what we've seen as Jose said in his prepared remarks, just sort of steadily rising demand for spare parts to support rig reactivation rig operations.
Kind of flattish sequentially, but year over year up 27% and up for both offshore and land and then drill pipe as the third.
That drilling contractors.
Spend money with us and that's actually in our Wellbore technologies segment and again both of those just a monster order in Q2 down a bit in Q3.
Okay.
So very very strong and in fact Q3 was up 67% year over year. So you add all that together.
We are seeing rising.
Expenditures <unk> expectation is that continues as the offshore it gets back to work as drilling picks up in international markets.
Okay Super Thanks for that Jose.
I don't think I heard anything on unallocated you usually don't guide to it but it was it was up.
Quite a bit from second quarter.
How should we be thinking about that for fourth quarter.
Yes, so from.
Basically the <unk> line moving.
As it normally does a similar percentage from pre elimination revenue and then probably looking at a couple of million dollars increase from a.
At the EBITDA level with the growth.
Got it so something like 60 million Bucks.
Great. Thanks, maybe just shy of that.
I will turn it back.
Alright, Thank you Mark.
Thank you and one moment for our next question.
Our next question comes from the line of Tom Curran with Seaport. Your line is open. Please go ahead.
Good morning.
Yes.
What lead times is the cat.
Higgins why unit quoting at this point for Newbuild crack spreads and when it comes to capital equipment sales for shale completions what level of competition are you confronting from the secondary markets such as auctions, how does the amount.
Pricing of used equipment out there compared to what you've seen at this point in prior use up cycles.
I'll answer the second part of that question first there is very little used equipment, that's really can be refurbished economically.
And what we've seen over the past year is more and more pressure pumper in North America are.
Pivoting towards buying new.
And the longevity and sort of the overall value offered by going into new versus.
Used I think is a lot stronger and then the first part of your question I think was lead times and more I would say plus minus a year.
Tier four engines are eight months plus in terms of deliveries.
So what we're looking at I will say.
Yes.
Made some through purchases of some of the key items, so can probably deliver maybe depending on what our customers are buying maybe a little more quickly than our competitors.
Out there, but on the whole.
That's probably what you are looking at.
Yes, that's all consistent with the check side done but wanted to be sure I heard you guys weigh in as well thanks for that way.
Yes.
Could you give us an update on your annual revenue expectations or even just potential for Ccs and geothermal respectively by division. It seems as if Wellbore technologies has a product suite that spans both of those new energy segments.
<unk> taps has some specific offerings for Ccs and then rig tech has done some custom designed and systems for geothermal maybe just an update on each of those renewables markets.
Yes, Tom I think well.
Pulled back from providing granularity.
That youre looking for.
But our efforts.
<unk> energy transition opportunities are going are going very well and.
Particularly as clay touched on the backlog.
Ongoing work that we have related to offshore wind construction vessels momentum continues to build there as it does related to really a number of other of the other initiatives that we have going on related to energy transition, including geothermal that youre asking about and really we're seeing we saw really rapid sequential growth going from.
From Q2 to Q3, and I think the total company combined from a renewable standpoint was roughly $90 million or so in revenue in the third quarter.
Really nice trajectory. So we're really pleased with the way that those initiatives are shaping up for the company, yes, and just to add just a touch more color the win installation vessel space. We're in.
<unk> is market leader and we've come out with new technology that we referenced in our in our press releases as the majority of that 90 million, but we're seeing really good growth in particular on geothermal offerings and I think we mentioned in our prepared remarks re HEICO log has emerged as a market leader in terms of hard rock drilling this required for geothermal, but also generating a little bit of revenue in our solar.
<unk>.
And a lot of interest in <unk> technologies, we're the leading provider of gas processing dehydration.
Technologies that are directly applicable to <unk> and so we've got some some feed studies underway there and so really across the board very excited about all of that and then finally to put a bow around it in addition to fixed wind installation vessels.
There is some movement on the floating wind side as well.
And there as you move into deeper waters.
Kind of a different way that <unk> can participate in those projects with respect to the.
Helping build out the actual vessels, providing mooring systems.
And it's a larger kind of.
Revenue opportunity for us and so we're very pleased to be participating with partners and customers in Asia, and the North Sea and looking at specific floating wind opportunities that could be real real needle movers in the future. So.
So we continue to prosecute these opportunities and excited about the future and believe we have a lot of value to bring to the energy transition.
Thanks for all the color.
You bet.
Thank you and as a reminder, if you would like to ask a question at this time. Please press star one on your telephone one moment for our next question.
Our next question comes from the line of David Smith with PDP Advisors. Your line is open. Please go ahead.
Hey, good morning, Thanks for taking my question.
Good morning, David.
And then from Pickering Energy partners.
So I didn't think.
I would ask a question like this for a really long time, but here it goes.
Given how much capacity, Saudi is taken out of the Jackup market.
When I start to count.
The jackups that are going to be left.
There just aren't that many that were delivered in the last 20 years.
Already contracted.
So assuming demand continues to grow for the next year or two.
I think we can get to a point, where the options to satisfy incremental demand becomes either a new jackup or the reactivation of our 47 year old cold stacked rig that hasnt worked in several years.
So.
Question is in your view do you think we'll see any new jackup orders in the next five years.
Also.
Should we think about the opportunity for Adobe on reactivation that the much older assets I expect those might include some pretty significant capital.
Capital equipment upgrades.
Great David.
Sounds great.
It is it's an interesting time for sure.
Listen.
Sure.
Probably aware, but.
In Saudi Arabia. There is there are plans to construct new jackups and so we.
We just recently opened our joint venture with Aramco built a rig equipment manufacturing.
Facility there in the Kingdom and.
And thats to satisfy very large land rig order, but in addition to that.
The Saudis are moving forward with our program to build out.
20 jackups over.
Period of time, and so we're well positioned to participate in that and so that's one of the ways I think that the gap will be filled and thats sort of in addition to the I think 37 Jackups that Aramco is.
Adding in the offshore to grow their production and so yes, we are.
Starting to face constraints around rig availability and Thats. The reason frankly that day rates.
Have moved up so sharply they've moved up materially for Jackups, but.
In the floating space.
Have roughly doubled.
12 to 18 month period, and so so all good.
Industry is going back to work and.
Very pleased that Adobe is well positioned I think to help our our offshore customers get there.
Yeah, absolutely I would say put an asterisk on that outside of.
Outside of Aero drilling.
Do you think there is potential for new Jackup orders in the next five years.
Well, we're not we're not forecasting at this point.
To be clear, but the dynamics are certainly getting a lot closer to that.
Supply demand tipping point.
And switching to land.
I've been wondering when we might see of new land rig ordered for the U S.
The.
A remarkable increase in pricing.
Would love to hear your outlook for additional new land rig orders.
U S but internationally.
Are you there and maybe you can give on what kind of conversations you are having.
Yes.
We follow that very closely just to put this in perspective, though the day rate recoveries I just talked about in the offshore are really pretty recent and in the land rig space in North America for Super spec rigs those those probably front ran the offshore by a quarter or two going.
Going the right direction, we we believe that we start to we're right at the edge kind of replacement economics, there's a lot of incremental day rate disclosure being made this week in earnings calls, but as we've kind of moved from the high $30000 a.
A day range up into the $40000 a day.
Range for Super spec rigs I think it starts to become.
The investment opportunities are for new capacity starts to look pretty compelling and so.
That's kind of where we are with respect.
To that category.
In international markets as I mentioned, we are in the process of building out.
A grand total of 50 rigs.
In our order for.
For Saudi Arabia, we've delivered the first two and the third is being.
Commission right now and so.
So we're just at the leading edge of that.
And those are very capable of high spec rigs, but I think that's sort of an indicator of things to come I think international markets in particular.
Have a long ways to go and stepping up their technology that they apply and drilling.
Theyre drilling operations.
And again <unk> is well positioned to help them accomplish that so.
Still still a ways away from.
Kind of the new building of rigs that we saw in the prior super cycle, but.
Certainly all signs are encouraging that we're heading in the right direction.
Great. Thank you very much.
You bet. Thank you. Thanks, David Thank you and one moment for our next question.
Our next question comes from the line of Stephen <unk> with Stifel. Your line is open. Please go ahead.
Thanks, Good morning, everybody.
Good morning, Steven.
Just curious on the third quarter.
Rig tech margins were better than we thought and based on the commentary you gave they look.
Increasing from here.
How should we think about rig tech margins as we go into 2023.
Steven I think.
It's obviously dependent on kind of what the.
What that means and what the overall growth is but I think we've.
Repositioning the company appropriately.
We've gotten the restructuring and cost savings initiatives behind us at this point and so really.
As we look at.
Not just rig tech, but really all of the businesses I think the best way to think about it is that we should start to see more of what those historical normalized incrementals.
Yes.
Have been and so.
For the for the rig business historically, that's been kind of mid 20% type type incrementals caps upper twenty's lower thirties.
And Wellbore call it.
Somewhere between 30% and 40% Incrementals and so I think we're.
Approaching a place that at least over a period of time, there is always ebbs and flows within a quarter, but over a reasonable period of time that we should be back to those normalized incrementals hopefully all the charges and restructuring is completely behind us I mean normalized volumes.
And then in addition rig rig really has been facing some headwinds related to supply chain issues as well and so kind of the continued normalization of supply chain will help a lot. So those are good tailwind for rig margins going forward.
Okay, Great. That's helpful color and then the other the other quick one.
It's a simple question looking out past the fourth quarter, but when you think of the <unk> business I mean, it feels like momentum is building. It sounds like you are on the cusp of sort of a pretty nice acceleration in the topline.
Is that consistent with with what Youre seeing and when do you think you can see a year or two of them sort of outsized growth.
Yes, it's going the right way.
But if you look back in the last couple of years, it's been pretty challenging for the last.
A few quarters, we've been battling projects that we undertook in the downturn of 2020 combined with supply chain headwinds and challenges in Asian shipyards, et cetera, et cetera, et cetera, that's all kind of that's clearing but we kind of have to work those projects through our through our system.
Likewise, I think we need to get to a place where we're seeing more.
Pricing leverage in some of our quicker turn businesses our stimulation equipment.
For instance in international markets.
It is still has a ways to go in terms of recovery.
But it's all going the right way and so I think that's going to be helpful for margin expansion going forward.
But still a ways to go and so.
We'll see.
Great. Thanks for all the detail on the call.
Thank you Ben Thank you Steven.
Thank you showing no further questions at this time I would like to turn the conference back over to Mr. Clay Williams for any further remarks.
Thank you Michelle and thank you all for joining US. This morning, we look forward to discussing our fourth quarter and year end results with you in February have a terrific day. Thank you.
This concludes today's conference call. Thank you for participating you may now disconnect.
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